All of a sudden investing for income has become popular again. And there is a reason for that.
More than $6.5 billion has evaporated from retirement accounts since 2007, coinciding with a growing trend of workers postponing their retirements or returning to the workforce at least part-time.
The U.S. economy is still lagging and the next European crisis is never far away, and that isn’t good news for investors who are dependent on the stock market to build retirement nest eggs or generate income for living expenses.
A retiree with $100,000 in a money market account might earn about $50 a month. Even at 10 times that amount, you’re pretty much limited to paying the electric bill and buying groceries without dipping into your nest egg or relying on a job that might not be there for as long as you need it.
To face life in an environment where traditional income investments like CDs, money markets, and bonds producing only .01% to 1% is depressing. Nobody wants to cut short their dreams just because yields are ridiculously low.
But if you’d instead like to bring in $500 a week (or however much you want/need) — using the money that’s otherwise stagnating in your account — then I have the solution for you.
That’s why I’ve written this personal “blue print” article so you can easily create an income machine for yourself and generate an extra paycheck every week.
Let’s get started.
It’s a simple concept. Selling options . . . calls and puts for MONTHLY CASH income.
It’s amazing but by taking positions in the right combination of stocks or ETFs and selling puts or covered calls you can generate anywhere from 2% to 5% of extra income per month.
And with little or no risk to your capital.
Here are several things to consider:
- When you sell an option, you are collecting the cash up front. You are already ahead.
- When you sell an option, you are transferring risk to the buyer.
- This cash gives you the ability to manage the position – you have cash in hand to “close” or buy back the put or call, at a profit or loss, without using any or a good deal more capital. This enables you to conserve capital, the basis for regular monthly income.
- And accepting cash enables you to create targets for your positions and voila! The sum of these targets, when set properly, give you a target income for the month, and that is what this is all about.
You don’t need to be an “options trading pro” to get started or a special account. If you are serious about generating “real income” in your investment account, even during the most volatile market conditions and then read on.
Here are 6 low-risk ways you can use to sell options to generate serious monthly cash income starting today.
1) Volatility in the Market
You may be new to the VIX, “the Fear Index.” This is the measure of market volatility and fear and the name we trade is the S&P 500 VIX Short-Term (NYSE:VXX), the ETF for the VIX. If you look at a chart of the VXX, you can see where we sell at valleys and buy back puts at peaks. When fear increases, when uncertainty increases, you can sell puts on the VXX and as the VXX goes up, the value of these puts decline and you can buy them back for nice cash gains. And in these kind of market conditions, you can do it again, and again, and again for consistent regular income.
2) Trouble in the Financial Sector
Financial stocks are in trouble and Wall Street knows it. That’s why I like the Ultra-short Financials (NYSE:SKF), the double inverse ETF on the bank sector. This names moves up 2% for every one percent drop in the banks. And they are still dropping because of continuing busted balance sheets and little possibility to grow earnings in the middle of this double dip recession. The strategy is simple: sell near-term “in-the-money” Puts on the SKF when bank failures hit the news. This trend is likely to continue making the SKF a regular position on the “income generating” circuit.
3) The Run on Precious Metals
Gold and silver may have hit a wall at $1900, but the run is not over. Gold — whether you are a gold bug or not – I am not — people are flocking to it and its cousins, silver and the gold miners. It is a great long term play but one traders can use every day to generate cash. You are selling into what the market is doing, not because you believe gold is one thing or another.
You can play gold for income two ways – buy the ETF for gold, the SPDR Gold Trust (NYSE:GLD) and write covered calls or simply sell puts on the GLD. And you can do the same with its cousins, the gold miners, represented by the Gold Miners ETF Trust (NYSE:GDX). Or how about selling a put on an individual name like Newmont Mining (NYSE:NEM), the only stock to go up among the S&P 500 when the market crashed in August. Gold may be down now, but over the next year it will continue to be a great source to pick-up income from short-term positions.
4) Even More Income from Income Stocks
Yes, there are a number of stocks that generate 3%, 4% or even 6% dividends, but many rise and fall in correlation with the market, meaning you could experience breathtaking losses anytime the market takes a hit like it has many times this year.
But, there are a few steady income generating stocks that are not wildly volatile (up or down)—you could say they are stuck in a narrow trading range, but still throw off decent dividends and enjoy “rich enough” premiums to sell covered calls around.
Two examples are the phone companies, both Verizon Communications (NYSE:VZ) and AT&T (NYSE:T), that pay over 4% in dividends but carry enough premium to let you generate an extra $50 to $75 per month per contract in income writing covered calls. Both stocks are relatively “boring” stories but hold up well when the market gets creamed because their relatively “high-yield” attracts big institutional dollars in times of trouble.
Why not get paid “bonus income” for owning two steady, well-known names that are not going away.
5) The New Frugal
Wall Street sees spending or slowing everywhere except for the upper class. Maybe that is true – but among people who are more careful about what they are spending, or have less to spend, the dominant trend is what I have been calling, for more than two years, The New Frugal. The geniuses think that luxury brands such as Tiffany (NYSE:TIF) or Coach (NYSE:COH) are doing well because wealthy people are continuing to spend or spend more. Wrong – they are doing well because middle class people are reducing spending on most items and saving their dollars for high quality, name brand purchases.
For investors, the New Frugal is a permanent change in shopping habits. Do I exaggerate? The sale of diamonds on the mass market, that diamonds are forever, give her a diamond wedding ring and so on, we invented during the Great Depression.
For income investors active enough to “sell options” on dips, every time there is a pull-back due to fears over the economy and spending, brand names – Tiffany, Coach, Ralph Lauren (NYSE:RL), Nordstrom (NYSE:JWN) and so on – present opportunities for accumulation – if you sell calls or puts on them for quick cash!
6) Create Your Own Dividend
I used the word “yield” before. Let me now use it in a more concrete way.
Suppose you own Starbucks (NASDAQ:SBUX) shares. They pay a dividend that would not give you enough cash to buy a latte (grande, skim, extra foam please). You want income but you are a great believer in the long term value in the stock. What do you do?
Sell some covered calls. A stock like Starbucks, used to support the sale of covered calls throughout the year, can yield a more than 8% return on the capital you have invested in the stock. And if you manage your positions properly, you will probably not get called out of the stock – the buyer will not exercise the call option.
The ability to create your own dividend really resides in your “idea” about Starbucks. Let’s say you do not want to own the stock, you were blown in the post Lehman crash and want to stay pretty liquid (pardon the pun). And you still love Starbucks. Instead of owning the shares and selling covered calls, you sell puts. Over and over again. You may even yield more than that 8% because you need 15%-20% less capital, on average, when selling puts.
Sure beats buying and holding low-paying dividend stocks.